On May 31, 2016, we issued an updated research report on independent oil & gas exploration and production firm, Cimarex Energy Company XEC.
Cimarex has established a track of focused and disciplined exploration and production (E&P) capital spending that drove profitable growth in the past. Management’s conservatism can be gauged from the fact that the company does not recognize undeveloped reserves as part of its proven reserves for reporting purposes. As a result, all of the company’s reported reserves are developed.
The company’s substantial acreage in core operating areas gives it a detailed inventory of exploration and development prospects that provide it with relatively low-risk volume growth opportunities. We expect the company’s continued focus on drilling activities to remain the primary production growth driver. As a result, the successful projects are boosting the company’s volumes and reserves.
Cimarex Energy’s financial flexibility and strong balance sheet are real assets in this highly uncertain period for the economy. The company exited the first quarter of 2016 with nearly $676.6 million in cash, while its long-term debt consisted of $1.5 billion of long-term notes. Cimarex Energy had no borrowings under its revolving credit facility and has a low debt-to-capitalization ratio of 36.6%.
However, Cimarex Energy’s long-term production and reserve growth primarily depend on its acquire-and-exploit model. The company may find it difficult to complete accretive transactions in the future, which in turn, could negatively impact its growth rate.
Moreover, like other independent exploration and production companies, Cimarex Energy’s results are directly influenced by oil and gas prices. Continued weakness in commodity prices has significantly affected the company’s revenues, earnings and cash flows.
The effect of the oil and gas price slump has been more pronounced on Cimarex Energy’s top line, as the energy explorer did not hedge its production. The move could spell more trouble for the beleaguered company if prices slide again.
Stocks to Consider
Currently, Cimarex Energy carries a Zacks Rank #3 (Hold). Some better-ranked players from the same space are CVR Refining, LP CVRR, PetroChina Co. Ltd. PTR and Braskem S.A. BAK. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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